Why Patent Attorneys should talk to Corporate Finance (and why Finance should listen)

Attention patent attorneys- if you could show your clients an extra $5 or $10 million in ‘found money’, would that be helpful? It’s easy to find and odds are that you helped your client in making it. I’m talking about patents of course. The question is- now that you’ve found it how do you get to the cash that’s in it? There are a few ways to go about it- most of them are hard but one is fairly easy. You are probably familiar with hard paths to patent cash- out-licensing, selling non essential assets or litigation. These ways are hard because finding the parties to complete the deals is hard or in the case of litigation expensive to initiate. Plus these deals are not a sure thing as to whether you can net out the cash after all your hard work and that can make clients very unhappy.

The easier way is monetization. Monetization is recapitalizing patents based on how useful they are in making money for the client. Your clients understand where they use patents for their own businesses, so there is good and reliable information that is easy to obtain and calculates the patent cash value. The counterparties to monetization deals are banks or investors that are eager to invest in your clients’ continuing successful use of those same patents. They are on your client’s side which can’t always be said about prospective licensees and certainly is never the case with infringers.

With monetization, each patent can easily represent US $1-5 million in cash value to the client’s business so even a portfolio of four or five patents can have US$ 4-25 million in ‘found money’ value. Decisions to monetize most often depend on decision makers in your client’s corporate finance department. This is where Carthage Intellectual Capital can help patent lawyers and their firms to close the deal with corporate finance on the ‘found money’ opportunities in patent portfolios. We know the translation values of invention claims and cash. And corporate finance can control the timing and quantity of patent monetization transactions to their maximum benefit. As patent attorneys, you will know where the future transactions will come from. I’m talking about the future patent estate of course. It’s a lot easier to get paid on new patent dockets with the found money of previous patents. Learn more at www.carthageic.com.

Pricing Intellectual Property- The Rule of Eight

It’s exciting when our clients first learn that their intellectual property (IP) is; a) a capital asset and; b) can be capitalized using our sale license-back (SLB) process. Not surprisingly, the next question is- what’s my IP worth? In the case of patents, here’s a benchmark that Carthage Intellectual Capital uses. Multiply the annual research and development (R&D) expenses times eight. The result is a useful first estimate of the value of your total patent IP portfolio. Hence the name, the Rule of Eight.

The Rule of Eight is not a guarantee of IP value. But it reflects the principle that enterprises create IP today to be useful for an extended period of time. Carthage’s experience is that, on average, the financially useful life of IP is around eight years. The number eight is not merely coincidental; the behavior of patent centric companies anticipates it.

Consider the typical company that relies on patents to make, use or sell its goods and services. A patent’s legal life is 20 years from its priority date. It usually takes 2-3 years for the patent office to examine and issue a patent. That leaves an effective legal life of 17-18 years. Because technology improves over time, patent producing companies continue R&D spending to invent the improvements. Once a patent expires, it is logical that a patent reliant company will likely replace it with a new patented invention.

If a company obtains one patent per year as a result of its R&D, it will possess 17 or 18 legally active patents in the course of a similar number of years. The average legal life of the patent portfolio is the sum of the years of remaining patent lives divided by the number of active patents. In our hypothetical, this turns out to be around nine years. A patent investor will want a ‘risk cushion’ on the investment and 10% is a typical allowance. Therefore eight years is a logically consistent estimate of the time in which a patent portfolio is valuable. And eight times the current year’s R&D expense is an approximation of patent portfolio value if used as an asset for a sale and license-back transaction. The Rule of Eight is a helpful tool for disclosing the financial intentions and value of IP to the financial departments of a business and the financial community at large. To discover the value of your company’s IP contact us at info@carthageic.com. Perhaps the Rule of Eight can turn your IP into ‘pieces of eight’.

PS- If this is your first time hearing about the sale and license-back of intellectual property check out www.carthageic.com to learn more about this revolutionary process that transforms IP into economic gold!

It’s a Demand World- Really??

Everyone is talking about the need for consumer demand to pull the global economy out of the tank. On this there even appears to be political consensus.  The only issues are taxes and government spending. Some want more taxes and more government spending to fund the demand that the unemployed consumers can’t afford. Others want to cut taxes and government spending to leave money in the hands of the remaining employed and encourage them to purchase more things that they don’t need. Is it me, or are the current strategies just a choice of economic suicide by poison or drowning?

As a capitalist I believe in supply and demand, free markets, and rule of law. So if demand isn’t working maybe it’s time to check out the supply source. Is there a demand for better means to supply our markets? You bet- it’s called innovation. And the asset that fuels innovation is intellectual property. So far, it is untouched by the credit markets. More importantly, it is already an existing group of assets.

Innovation is about doing something better. It can be a bucket, a light bulb, a car, solar collector or a shoe.  Or it can be a better way to furnish an existing good or service. Innovation builds the demand for new means to supply the innovation. Intellectual property like patents is a first means to build the structure needed to furnish the new means of supply. The investment in structure is usually a multiple of the existing market. The key is to access secure asset based credit to build the new means.  Let me again suggest- patents. They are an under recognized and non-capitalized resource representing trillions of dollars in assets. We can access this credit reservoir through the sale and lease mechanics of real property. It’s called the sale license-back of intellectual property. This is not phony demand or stupid consumerism. It’s time to stop being crazy and start being innovative. Really.

Sale/License-back; A new source of capital for smaller companies

If you have been following our blog, you will have noticed that for the last several weeks we have been introducing a new transaction type–sale/license-back of intellectual property. We’ve concentrated on the property type more than the transaction, which is really quite familiar in another context.

Everyone is familiar with a sale/lease-back of real estate or equipment or software–a company sells property in return for cash and executes a lease (or for software, a license). The lease gives the company continued use of the property in return for periodic payments of rent.

As a property class, intellectual property is treated a little differently than a tangible asset when it comes to valuation and legal status. However, a sale/license-back of patents, trademarks, or copyrights is really just the sale/lease-back we all understand for a new class of property.

Carthage Intellectual Capital Management has introduced this new business process. We are looking for deals now. If your company has intellectual property and could benefit from new capital, we’re at info@carthageic.com.



What College Doesn’t Teach You about Sale License-Backs (But Should)

It’s summer intern season and Carthage Intellectual Capital is in full court press to get its share of the best and brightest.  As bright as they are, the sale license-back is completely unknown to interns. So here’s the primer we are using to get them engaged in the biggest financial revolution yet of the 21st century:

1. Suppose a company has 5 patents all of which are valid for 10 years. The patents originally cost the company $1000 in R&D.

2. Now suppose that Carthage (or a financing company licensed by Carthage) agrees to acquire all 5 patents for $1000. (How we figure this out relies on other patents under license to Carthage).

3, Carthage also agrees to license-back all of the patents to the company to use for 10 years in exchange for a royalty of $150 each year. This works out to $1500 for 10 years. (Again how we figure this out relies on other patents under license to Carthage).

4. Suppose the company has a tax rate of 40% on income only. Assume the $1000 it gets from Carthage is not taxed (more on this in future blogs). Carthage is organized like a partnership and pays no taxes.

5. The $150 the company pays as a royalty is an expense each year and reduces the income by $150. This reduces taxes payable by the company by 40% of $150/yr or $60/yr which is a tax credit and which is like getting cash refunds of $60/yr. ($600 for 10 years).

6. Now we can calculate how the sale license-back affects the company and Carthage over the 10 year agreement as follows:

                                                         Carthage                                         Company

Purchase Patents                             -$1000                                             +$1000

Pay Royalties                                   +$1500                                             – $1500

Tax Credits (40%)                            $   000                                            + $   600

Profits(+)/Losses(-)                        +$   500                                             +$   100

Carthage makes money because the royalties it receives are more than it paid for the patents (+$500). But the Company also makes $100 because its tax credits plus the sale price are more than the royalty payments. This the financial power of licensing versus borrowing.

Now suppose the company had decided to borrow $1000 for 10 years in exchange for paying back the principal of $1000 plus $500 in interest. It still gets $ 1000 but pays back $1500. What then?

The difference is in the tax credit. You only get a tax credit on interest paid on a loan, not the principal. The 40% tax credit on $500 in interest is $200. So instead of paying $1500 pay to the bank, the company pays $1300 net of tax credits which means it costs the company -$300 to borrow $1000 for 10 years. In our examples here licensing-back a $1000 patent pool is $400 cheaper than borrowing $1000. This part is not an invention of Carthage- it is the pre-existing rules of the IRS.

And this is what our interns will be explaining to our clients this summer. Perhaps they will have an opportunity to enlighten your interns as well.